Supreme Court rules licence fees as capital expenditure, affects Airtel and Vi's taxation

The Supreme Court of India has delivered a decisive ruling against major telecommunications companies, specifically Airtel and Vi, in a crucial tax case. The apex court dismissed the arguments put forth by these telecom giants, affirming that the licence fee paid post-July 1999 should be recognised as capital expenditure rather than revenue expenditure.

The Tax Department's plea against the telcos, which had been embroiled in a protracted legal battle over the classification of licence fees for tax computation, has been upheld by the Supreme Court. This verdict, overturning the previous rulings of the Delhi High Court, Bombay High Court, and Karnataka High Court, represents a significant shift in the tax landscape for these telecom industry leaders.

At the core of the Supreme Court's decision lies the principle that making licence fee payments in installments, as stipulated in the licence agreement, does not change the fundamental nature of the payment. It underscores that the installment-based nature of payment does not convert a payment that is fundamentally a capital expense into a revenue expense. Consequently, the classification of the licence fee remains unaltered, firmly categorised as a capital payment.